AIG and Berkshire H./// facts are pouring out in this one

[Miklos Vasarhelyi <miklosv@andromeda.rutgers.edu>]

June 6, 2005

Chief of Berkshire Unit Pleads Guilty in A.I.G. Inquiry

By
TIMOTHY L. O'BRIEN 

A senior executive of the General Re Corporation, John Houldsworth, plans
to plead guilty this week to federal criminal charges of helping the
insurance giant

American International Group doctor its books, according to Mr.
Houldsworth's lawyer and prosecutors conducting a wide-ranging
investigation of abuses in the insurance industry.

The Securities and Exchange Commission and the Justice Department also
said today that Mr. Houldsworth, who has been put on paid leave by
General Re, would cooperate with law enforcement authorities as they
continue to investigate and seek to prosecute other executives involved
in fraudulent transactions. His guilty plea would be the first from a
major figure in the inquiry.

General Re is a subsidiary of

Berkshire Hathaway Inc., the Omaha holding company controlled by
Warren E. Buffett. A.I.G.'s former chairman and chief executive, Maurice
R. Greenberg, was forced to retire in March because of improprieties
associated with sham transactions that General Re and A.I.G. devised and
that artificially bolstered A.I.G.'s reserves by $500 million. Those
transactions are at the center of the federal inquiries and are also
being scrutinized by the New York State attorney general, Eliot
Spitzer.

An S.E.C. fraud complaint filed today against Mr. Houldsworth offers a
wealth of details about other senior executives at General Re and A.I.G.
who set the transactions in motion. According to the complaint, the group
called on Mr. Houldsworth, who oversaw General Re's Dublin operations
until the summer of 2001, to engineer the doctoring of records pertaining
to the deals.

The complaint, citing telephone calls and other communications, indicates
that Mr. Greenberg; General Re's former chief executive Ronald E.
Ferguson; A.I.G.'s former chief financial officer Howard Smith; a former
A.I.G. reinsurance executive, Christian M. Milton; two former General Re
senior executives, Richard Napier and Elizabeth A. Monrad; and other
unnamed General Re executives all conspired to falsify A.I.G.'s
accounts.

"This is another step in our ongoing investigation of the abuse of
insurance and reinsurance to falsify a company's financial results,"
said Mark Schonfeld, head of the S.E.C.'s New York office, about the
charges against Mr. Houldsworth.

On May 26, Mr. Spitzer filed fraud charges against Mr. Greenberg and Mr.
Smith. The two men's lawyers are contesting the charges. The S.E.C.
recently notified Mr. Napier and Ms. Monrad that they were targets of its
investigation.

About two weeks ago, Mr. Ferguson invoked legal protections against
incriminating himself and declined to respond to regulators' questions
after he was subpoenaed by the S.E.C. and the Justice Department,
according to Berkshire Hathaway. Mr. Ferguson did not return repeated
earlier phone calls seeking comment on the investigation; he could not be
reached for comment today. Mr. Milton's lawyer declined comment, saying
he had not yet read yesterday's S.E.C. complaint.

Mr. Houldsworth's lawyer, Larry Byrne, said his client faced a prison
sentence of as much as five years in connection with his guilty
plea.

"John is cooperating fully with the U.S. D.O.J. and S.E.C. and
accepts full responsibility for his role in these matters," Mr.
Byrne said in a statement. "He deeply regrets his actions in working
with others to assist in this scheme."

The S.E.C. complaint against Mr. Houldsworth notes that the case involved
"deliberate or extremely reckless efforts" by senior General Re
executives "solely for the unlawful purpose of achieving a specific,
and false, accounting effect" to benefit A.I.G.

The complaint said that A.I.G. had paid General Re a $5.2 million fee for
the deal, an arrangement put together in an undisclosed side
agreement.

Mr. Greenberg, according to the complaint, told Mr. Ferguson that the
improper deal would not require A.I.G. to take on any actual insurance
risk, even though A.I.G. would be able to account for it as such. In
order to make sure that insurers are not padding their accounts through
sham transactions, regulators require at least a modicum of risk to be
transferred in any insurance deal.

In previous interviews with The

New York Times, Ms. Monrad denied any wrongdoing in connection with
the transactions. She did not return a phone call today seeking comment.
According to the S.E.C. complaint, she and Mr. Napier consulted with Mr.
Ferguson in November 2000 about satisfying Mr. Greenberg's desire for a
risk-free transaction. The sham transaction being investigated by
regulators occurred shortly after that.

Mr. Greenberg assigned Mr. Milton to work with the General Re executives
on the deal, according to the complaint. The group then worked with Mr.
Houldsworth to complete the deal. According to an e-mail message cited in
the complaint, Mr. Ferguson, who retired as General Re's chief executive
in 2001, told his executives to "keep the circle of people involved
in this as tight as possible." A notation on a file for the deal
said that Mr. Ferguson wanted it "kept confidential and consequently
to be kept locked" in a desk in General Re's Dublin
offices.

The complaint asserts that Mr. Houldsworth devised about $100 million of
risk transfers that were "pure fiction" as part of the A.I.G.
deal, with the knowledge and approval of Mr. Napier and Ms. Monrad.
According to the complaint, Mr. Napier at one point circulated a memo
nicknaming the transaction the "MRG Reserve Project," using Mr.
Greenberg's initials. 

kkk

Miklos A. Vasarhelyi
KPMG Professor of AIS
Rutgers University
Director Rutgers Accounting Research Center
315 Ackerson Hall
180 University Avenue
Newark, NJ 07102
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